Logo of jester cap with thought bubble.

Image source: The Motley Fool.

MISTRAS Group Inc (NYSE:MG)
Q2 2019 Earnings Call
Aug 6, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. My name is Daniel and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. I'll now pass the call over to MISTRAS Group Director of Marketing Communication. One moment while we connect.

Nestor S. Makarigakis -- Group Director of Marketing Communications

Welcome to the MISTRAS Group conference call for its second quarter of 2019. My name is Nestor Makarigakis. Participating on the call for MISTRAS will be Dennis Bertolotti, the Company's President and Chief Executive Officer. Ed Prajzner, Senior Vice President, Chief Financial Officer and Treasurer and Jon Wolk, Senior Executive Vice President and Chief Operating Officer. I want to remind everyone that remarks made during this conference call will include forward-looking statements. The Company's actual results could differ materially from those projected. Some of those factors that can cause actual results to differ are discussed in the Company's most recent annual report on Form 10k and other reports filed with the SEC.

The discussion in this conference call will also include certain financial measures that were not prepared in accordance with U.S. GAAP. Reconciliation of these non U.S. GAAP financial measures to the most directly comparable US GAAP financial measure can be found in the tables contained in yesterday's press release and in the Company's related current report on Form 8-K.

These reports are available at the Company's website in the Investor Relations section and on the SEC website. I will now turn the conference over to Dennis Bertolotti. Dennis?

Dennis M. Bertolotti -- President and Chief Executive Officer

Thank you, Nestor. And good morning, everyone. During today's call, we'll give you an update on MISTRAS's business performance. Financial results for the second quarter and first half of 2019, as well as provide our outlook for the remainder of the year.

Second quarter results were solid across the board from the top to the bottom line. Revenues, margins, net income, earning per share, cash flow and adjusted EBITDA all achieved our expectations with significant improvement both year over year and sequentially. It is worth mentioning that our second quarter of 2018 was a very strong quarter for us, making our achievement this quarter even more noteworthy given the challenging comparable period. We maintained a strong momentum into the third quarter and we continue to feel good about where we are in our outlook for the year. Consequently, we are reiterating our existing fiscal 2019 guidance. Our underlying business remains robust with revenues up almost 5% from a year ago through a combination of both organic growth and expected contributions from our most recent acquisition. On a constant currency basis, revenues were up almost 6.5%. Results were once again led by strong performance in the oil and gas market, which is primarily reflected in our services segment where organic revenue growth was nearly 4% on a constant currency basis.

Although we did get off to a slow start in the first quarter, the second quarter, returned to a more normalized level activity such that the overall market over the first half of the year puts us on track for the solid growth we anticipated for the full year 2019, aiding our recent wins and market share gains and we feel very confident in our outlook for this sector.

With nearly 50% of our oil and gas business being evergreen contracts and the addition of onstream and the less cyclical midstream segment. We continue to structure our operations to better balance market risk. While oil and gas was the largest contributor, it was complemented by growth in other verticals. For instance, products and systems recently won a $4 million bridge monitoring contract.

We've also had several other new wins across multiple customers spanning several of our end market verticals and we continue to bid on new opportunities on a global basis. Our recent acquisitions continue to perform well. West Penn had a good 2018 and that has continued into 2019. Growth in the aerospace market is one of our corporate objectives and the outlook for the industry continues to be strong in 2019 and beyond. Onstream, which was acquired in December 2018, is also having a good year.

They are doing particularly well in the U.S., where we have been able to leverage existing MISTRAS midstream relationships. We are excited about the recent commercialization of our 20-inch tool and the progress being achieved with our larger 24-inch tool, which is expected to be ready later this year. Onstream will be a strong pillar of our overall growth strategy focused on pipeline integrity.

The various initiatives that we have undertaken from product divestitures to pricing discipline is leading to margins that have been consistently expanding over the last several quarters. In the second quarter, we extended this trend with 120 basis points expansion of gross margins to 29.9% from 28.7%. One of our key corporate initiatives is to achieve appropriate value for our services. And this year, our goal is to maintain gross margins at this level throughout the remainder of 2019. The Company has historically always generated attractive cash flow and our cash flows from operations are on track so far in 2019, improving over the first half of last year to $21.1 million. Free cash flow of $9.1 million is also up on a year-over-year basis. Ed, will go through our detailed financial results in a few minutes, which evidenced our strong execution thus far in 2019. For the longer term view, we have been steadily, albeit somewhat quietly, transforming MISTRAS to become the supplier of choice to position ourselves for additional wins in the future by maintaining our focus on the following; A, delivering value, we capture relevant data and quantify the value we deliver. B, meeting our promises, regardless of any hardships this might entail. C, working on the same side of the table as our customers, innovating to drive productivity for them. A great example is MISTRAS Digital, where we include customer feedback in developing a solution. And lastly, D, developing industry-leading productivity tools like our Advanced Radiographic Testing Crawler with this innovative technology covered by IAP [Phonetic] protection.

Each of these areas are key differentiators, enabling us to change the conversation with our customers, create demand and gain market share. Our core business is solid and growing organically. And this speaks volumes to our strong product offering and the demand for our services as fostered by our excellent industry relationships. We are also investing in and preparing for the future by developing technology oriented growth channels. Onstream's Streamview data analytics facility, our PCMS software and more recent field tablets [Phonetic] are just some of the technology we are using to build a platform that anticipates the impending growth in the demand for more predictive analytics.

MISTRAS Digital is an important part of our long term vision and we are focused on building it both organically as well as through strategic acquisitions to complement our existing technology. We are on track with our expected progress for MISTRAS Digital. For the rest of 2019, we expect to keep standing up new beta sites within our customer base as we ensure our customers are getting the information and value that they expect from the program.

In early 2020, we should be creating new full time sites using our digital solution and what will be an early version of the full benefits that can be achieved by utilizing real time smart data tools. I will now turn over the call to Ed for detailed review of the financials for the quarter.

Edward J. Prajzner -- Senior Vice President, Chief Financial Officer and Treasurer

Thank you, Dennis. To reiterate, Dennis's comments, second quarter results have us on pace to achieve our financial performance objectives for the full year, as reflected in our original outlook for 2019. Looking at results for the second quarter, consolidated revenues were up nearly 5% to $200.6 million, but up closer to 6.5% on a constant currency basis. Organic growth was 2%, with acquisitions contributing 5%, offset by an approximate 2% decline due to unfavorable currency translation. Consolidated gross profit for the quarter was approximately $60 million, a 9% increase over the year ago quarter. Consolidated gross margins improved significantly to 29.9% for the second quarter compared with 28.7% in the prior year. An increase of 120 basis points. Margin expansion reflects a more favorable service and product mix, which in turn reflects a more disciplined growth strategy, selective pruning of under performing operations and contracts, and an acquisition strategy focused on higher margin businesses. Operating income improved 50% for the second quarter to $15.4 million compared with $10.3 million in the comparable period last year.

As Dennis mentioned, our second quarter last year was a strong period to compare against, making our performance this quarter all the more remarkable. Net income improved in the second quarter and was up 24% and diluted earnings per share were up 30% both on a GAAP basis. These increases substantially outpaced top line growth and are indicative of the leverage inherent in our model. Second quarter results included a net bad debt recovery of $2.7 million on a pre-tax basis. This was comprised of a current period $1.7 million cash collection related to a customer originally reserved in 2017 and $1 million partial reversal of a customer reserve recorded earlier in 2019. Adjusted EBITDA was up 14% to $24 million for the second quarter of 2019, compared with $21.1 million in the same period last year. As a percentage of revenue, adjusted EBITDA expanded nearly a full point to 12% for the second quarter compared to same period last year, which demonstrates that our focus on both organic and acquisitive growth being margin accretive is achievable.

As Dennis mentioned earlier, the Company is a strong cash generator. Second quarter cash flows from operating activities were $12.9 million and free cash flow was $9.1 million. On a per share basis, free cash flow was $0.32 per share for the second quarter. We anticipate continued strengthening of our cash flow generation over the remainder of the year, attributable to our renewed focus on working capital management. Looking more closely at our segments, services revenue increased by 9% in the second quarter. Organic revenue grew 4% and Onstream incrementally added 6% to revenue growth. Unfavorable currency translation reduced services revenue growth by approximately 1%. The services segment generated a gross profit margin of 29.3% for the quarter, a significant improvement of 210 basis point compared to the year ago period of 27.2%. Margin expansion is a key corporate strategy and we are pleased to see our margins continue to expand in our largest segment, driven by pruning lower margin operations and growing higher margin operations, including acquisitions such as West Penn and Onstream. There is strong operating leverage in this segment with significant contribution margins wherein we could see a significant portion of incremental revenue drop straight to operating income.

This is one reason we are confident, we can sustain margins at the current level over the course of this year. International revenues in the second quarter were down nearly 10% from a year ago, with about 6% of that attributable to unfavorable currency rates and 4% due primarily to the runoff of the low margin German staff leasing business.

For the second quarter, International reported a 29.8% gross margin compared to a 30.9% margin a year ago, largely due to lower labor utilization. Products and systems revenues were down $1.1 million in the second quarter, with this decline being largely attributable to the product line that was divested in 2018. Gross profit margin increased slightly for this segment at 43%, compared with about 41% in the prior year. As Dennis mentioned, products and systems did win a $4 million project during the second quarter, which may partially benefit the fourth quarter of 2019. SG&A was very well controlled in the second quarter of 2019 at approximately 21% of revenue, essentially flat with the first quarter and up only modestly over the same quarter prior year.

Keep in mind that we achieved these results, despite the inclusion of overhead assumed with Onstream and the ongoing investment we are making in sales and marketing, as well as with developing and launching MISTRAS Digital. We are confident that the first half of 2019 spending level is a reasonable run rate for the full year. We continue to review and rationalize our company wide overheads for savings to make sure we maintain an efficient footprint to support and invest in our growing business.

Operating income was up nearly 50% for the second quarter to $15.4 million, compared to $10.3 million in the prior year. Non-GAAP operating income was $13.5 million for the second quarter of 2019, compared to $10.5 million in the prior year. Net income was $7.4 million or $0.26 per diluted share for the second quarter of 2019, compared with $6 million or $0.20 per diluted share respectively in the same period last year. Non-GAAP net income was $6.2 million or $0.22 per diluted share for the second quarter of 2019, compared with $6.1 million or $0.20 per diluted share for the prior period. This was a 10% increase in non-GAAP EPS. Adjusted EBITDA was $24 million for the second quarter, compared with $21.1 million in the same quarter last year, an increase of $2.9 million year-over-year. As a percentage of revenue, second quarter adjusted EBITDA was 12%, nearly one full point improvement over the same period in the prior year. The Company generated $12.9 million of cash flows from operating activities and $9.1 million of free cash flow for the second quarter of 2019, due to strong earnings, a positive reduction in working capital and better utilization of cash on hand.

The Company's net debt, defined as total debt, less cash and cash equivalents was $257.9 million at June 30, 2019, compared to $265.1 million at December 31, 2018. The Company paid down $17 million of debt during the second quarter of 2019 alone and has reduced total debt by over $20 million so far this year. As defined in our credit agreement. Our leverage ratio was approximately 3.75 times as of June 30, 2019. It is [Phonetic] our goal to reduce this ratio to around 3 times leverage by the end of this fiscal year and to get below 3 times leverage early in fiscal 2020.

Given our cash flow, annual interest expense and net debt, we believe our balance sheet is strong and we'll support the funding of both our organic growth objectives as well as any selective tuck-in acquisitions. Our effective tax rate was 37% for the second quarter of 2019. We project our effective tax rate to be approximately 35% for the full fiscal year.

And with that, I will now turn the call back over to Dennis.

Dennis M. Bertolotti -- President and Chief Executive Officer

Thank you, Ed. Heading into this year, we had anticipated a challenging first quarter, but returned to a more normalized level of activity beginning with the second quarter and extending through the balance of the year. And that outlook is proving out to be the case. Recent organic wins, which together with some remaining opportunities, only strengthened our conviction about the full year outlook.

Macro level economic drivers also remain positive. So we are confident in maintaining our forward momentum and are reiterating our guidance for the full year of 2019. That being, total revenues are expected to be between $765 million to $785 million.

Adjusted EBITDA is expected to be between $90 million and $93 million. Capital expenditures are expected to be up to $25 million and free cash flow is expected to be between $42 million to $45 million.

The Company is very pleased with the significant level of organic revenue wins that we have booked in 2019. We are successfully winning this new business due to a number of factors, including our solid reputation and brand, our consistently strong execution, including an ability to quickly staff up with qualified certified personnel to meet customer requirements and our ongoing investment in digital and go forward operating systems. We are focused on differentiating ourselves in the market, particularly through our expanding service lines which solve for customer's needs of reduced overall labor to accomplish a given project, and evolving digital solutions, as I mentioned earlier.

We also remain firmly committed to maintaining our position at the forefront of leading developing of advanced inspection tools, utilizing proprietary technology. We add value and this enables us to price at market and generate solid operating profit with predictable, attractive cash flow. In the process, we serve our customers with an exceptional return on their investment by delivering top quality results with superior economic value. I am confident that we are on the right path executing on our strategy in creating value over the short, mid and long term for MISTRAS shareholders. We will now take your questions. Operator, please open up the phone lines.

Questions and Answers:

Operator

Thank you, ladies and gentlemen. [Operator Instruction] Our first question comes from Tahira Afzal with KeyBanc. Your line is now open.

Tahira Afzal -- KeyBanc -- Analyst

Thank you, Dennis and your team. Congrats on a great quarter.

Dennis M. Bertolotti -- President and Chief Executive Officer

Thanks, Tahira.

Tahira Afzal -- KeyBanc -- Analyst

I guess, first question, you know, if I look at your top line guidance, essentially at the top end, it's assuming a flat revenue profile, versus what you saw this quarter roughly. So I would love to get a sense of what could take you to the bottom end of your revenue guidance. And, you know, that if you're being conservative.

Edward J. Prajzner -- Senior Vice President, Chief Financial Officer and Treasurer

You're asking, what's our bottom end of our revenue guidance? Is what you're saying?

Tahira Afzal -- KeyBanc -- Analyst

Well, I mean, the bottom end would assume that revenues fall off in the second half. So I was just trying to get an idea of what scenario would lead to that?

Edward J. Prajzner -- Senior Vice President, Chief Financial Officer and Treasurer

The way I see it, we are not -- we don't believe we're going to hit the bottom end. But I mean, we're still thinking, we're coming closer to our midpoint. Right now. We had really the only thing we've got is -- is trying to make up for Q1. We believe Q3 and Q4 will be on track with what we thought. We had a late spring. You know, there's a possibility, you could have a late fall. But we believe by the time the year is done, we should be -- we should be comfortably close to our midpoint.

Tahira Afzal -- KeyBanc -- Analyst

But then, Dennis, you know, midpoint puts you, let's say a -- sort of a 3% to 4 % revenue growth cadence, and I guess, is that what you see going out? I know, it's little early to talk about next year. But assuming, sort of a low to mid single digit revenue growth line, some more margin expansion, it seems like you should be in a position to comfortably cross a $100 million in EBITDA?

Dennis M. Bertolotti -- President and Chief Executive Officer

Yeah, I got it. We don't like keep talking about the headwinds of the past. But we still do have for a full year the $11 million from the one big customer. And then we're losing the fall off from the German portion of the manpower, which is full year is going to be somewhere around another EUR15 million [Phonetic] so about 17 or 18 or more. So you're talking close to $30 million that we've got that we're still trying to put behind us. When you throw that into where we're at for the full year, that's another almost 3.5%. So you're talking mid to high single digits. You're talking 6 or 7. We believe, we can outperform the market. We believe the market's in that 3% range. Maybe this year, we are closer to market, but next year, we believe we can beat that.

Tahira Afzal -- KeyBanc -- Analyst

Got it. Very helpful, Dennis. And last question, I think. My site visit with yourself and your team and thank you for arranging for that. Ready brought into sharper focus the importance of your digital initiative. Seems that the initial traction has been encouraging. How much do you expect those to help as you look out a year or so? Dennis.

Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer

Hi Tahira, it's Jon. Thanks for the question. So we're very excited about MISTRAS Digital. We have our first data site just converted to a paying customer in Q3 and they are talking to other refineries within their fleet. And it looks like, we'll have a second order fairly soon within that same customer. We have a number of sites lined up in our queue. And right now, it's just a question of trying to logistically get to as many as we can in the second half of this year. So as we look out to next year, I think, there's several million dollars in revenues that will be incremental to -- our top line and we expect the margin profile to be pretty accretive.

Tahira Afzal -- KeyBanc -- Analyst

Got it. Okay, Jon. Very helpful and I will hop back into queue.

Dennis M. Bertolotti -- President and Chief Executive Officer

Thanks, Tahira. Thanks for coming up and seeing the site.

Operator

Thank you. And our next question comes from Andrew Obin with Bank of America. Your line is now open.

David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst

Thank you. This is David Ridley-Lane on for Andrew Obin. Wondering, how the bidding activity has been outside of the oil and gas sector in 2Q?

Dennis M. Bertolotti -- President and Chief Executive Officer

Bidding activity, meaning, what the rest of the year will look like, you are saying?

David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst

New deal wins and just if you are seeing any hesitation from your clients?

Dennis M. Bertolotti -- President and Chief Executive Officer

If I were to break it out by aerospace, I would say, that's been strong. We haven't seen any deflection, but those are more on annualized programs. In the power sector for us, a lot of the power sector is based on wind and while those things don't go as far out. We're still seeing the bids coming in. So it's a strong spring and we expect the fall to be strong. But it's a little bit early for those kind of bids to be coming in. But we haven't seen anything that would deflect a strong -- that portion of the power. And we have been getting some wins inside of traditional fossil and nuclear here in the U.S. as well. And I think, that's just a -- more of market share gains, so much than differences in where the market's going for us. But it's a reflection of customers coming back to looking for stability in their provider.

David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst

Understood. And then on labor, continued labor market tightness here in the U.S., have you seen any change in wage inflation for field staff, any down tick in your retention rates for the staff and any pressure -- is wage pressure a risk on your gross margin goals. Thank you.

Dennis M. Bertolotti -- President and Chief Executive Officer

Yeah that's a good question. I mean, what we've been seeing is pretty consistent. There are areas in the West, in the Gulf and areas where the industrial is starting to grow quite a bit on their activity, where they knew this was happening for a while. So those customers have been talking to us about cost of living increases that don't increase the margins per se, but increases the spend so that they passes right through to make sure that they have enough skilled employees, because it is not just anything, it's all the trades that are becoming an issue. And they seen it long enough, particularly in the Gulf and West, where they planned and been talking to us for six months to a year in some cases about the large turnarounds they would have in 2019 and how to make sure they were staffed up. So the answer is we don't believe it will hurt gross margins. We believe, it will bump a little bit of revenue. But the bottom line margins will stay the same as well as the gross.

David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst

Thank you very much.

Dennis M. Bertolotti -- President and Chief Executive Officer

Thank you, David.

Operator

Thank you. And our next question comes from Chip Moore with Canaccord. Your line is now open.

Chip Moore -- Canaccord -- Analyst

Hey, guys, thanks. Maybe, you could expand on Onstream a little bit, how things are going in the U.S. on some of those midstream relationships and then launch of the new tool. How receptions been?

Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer

Yeah. Hi, Chip, it's Jon. We feel extremely positively about Onstream's uptick and introductions into the MISTRAS customer base in the United States. The great thing is, is that we have master service agreements with many of these midstream customers, and it's actually shortening the -- the sales cycle for Onstream because typically, there is a lengthy process just to get those master service agreements. OnStream has had nice traction with some of our U.S. customers on a limited basis so far. On this market, you have to earn your spurs and, and as they like to say, land and expand. You get that -- those first couple of runs get great results and then keep going with those customers. Onstream enjoys many benefits in terms of service times, turnaround time, record turnaround time, etc.

And in terms of the new tools, great reception. So far as the 20-inch tool and very shortly 24-inch tool. Dennis alluded to in his comments. We'll be launching as well. So so far, so good. Feel very, very excited about it.

Dennis M. Bertolotti -- President and Chief Executive Officer

And Chip, it's Dennis. The other thing we really haven't gotten into yet is getting Onstream integrated with more of our of our other services. PCMS and some of the other things we can do. We feel there's still a lot there that that can be done and we're working on it and we think we'll see those benefits as the year progresses and into 2020 as well.

Chip Moore -- Canaccord -- Analyst

That's great. Good color. Maybe another one on -- more on the modeling side. On international. Just remind us the exit of the German leasing business. Is that pretty much done now? And how do we think about that business in the back half of the -- that segment in the back half of the year?

Dennis M. Bertolotti -- President and Chief Executive Officer

Yeah, it's actually. The anticipated surplus [Phonetic] for us in April. And what surprised us a little bit is they started a little bit sooner. Employers are trying to get used to these new regulations, so they're hiring and moving and moving bodies around more than we expected. It will progress through the year.

We anticipate maybe 90% of it being done by the end of 2019. There will be a little bit that that that flows through 2020, but it probably won't be enough that we really even have to mention it or talk about it. It's just a matter of how fast do these customers, these large -- these large employers take on these folks because they've always been integral to their business.

And they knew they couldn't just let them go and start over. And they're just trying to figure out when to bring them on and all that. So it's -- that EUR15 million, we believe is the pretty good number for the full year. So you're talking about somewhere in the next two quarters, somewhere around $3.5 million or $4 million a year loss of revenue from that German segment. But we believe, by the end of the year, it will be behind us.

Chip Moore -- Canaccord -- Analyst

Perfect. That's helpful. Appreciate it. Maybe the last one for me, just on -- on the guidance in the back half. Similarly, sequential movement, anything to consider on seasonality or anything you're seeing in Q3 on how would you think about that trajectory?

Dennis M. Bertolotti -- President and Chief Executive Officer

You know, like any year, there's seasonality and Q2 and Q4 are always are -- typically are better quarters, Q1 and Q3 are the weaker of the two. When we change to calendar versus fiscal, it -- it reduce that seasonality a little bit. But it's still there. So, I mean, you know, there's always a potential for a late spring and a late fall.

And if that's the case, then Q4 could pop out stronger than Q3. But we expect on -- to both be pretty good this year. We're hoping that a lot of our customers stick to their schedule as they move it a little bit and push off, you know, Q4 can be a little bit stronger.

Chip Moore -- Canaccord -- Analyst

Got it. Okay. Appreciate it. Thanks a lot.

Dennis M. Bertolotti -- President and Chief Executive Officer

You got it.

Operator

Thank you. And our next question comes from Gerry Sweeney with Roth Capital. Your line is now open.

Gerry Sweeney -- Roth Capital -- Analyst

Good morning, guys. Thanks for taking my call. Just a quick question. And obviously, getting up to speed a little bit here. But what proportion of your oil and gas revenue is recurring? And then the follow up to that would be, any changes on that in the future? And then how much visibility do you have in terms of potential changes or customers changing some of their workflow? Thanks.

Dennis M. Bertolotti -- President and Chief Executive Officer

All right. Three questions. Let's see. Oil and gas. I would say, of our oil and gas revenue, we're probably in the 40% to 50% that's reoccurring. So that helps us to not be as -- much of a seasonality in Q2 and Q4. But you're always going to have growth in the various market sectors. Fortunately for us this year, a lot of our contracts were good contracts and they are in gas and oil.

So while we try to diversify into the power contracts that we've gotten, some of the aerospace, gas and oil is always bigger. So we're probably going to be still holding in that mid or high 50 range for the next couple of years as a percentage of our total. But the percentage of the reoccurring, even by some of the contracts we got this year, were reoccurring type contracts. So we're trying to make that more and more part of what our profile is.

And I'm sorry, I didn't get a chance to write down, what was the third part of your question. I know the second.

Gerry Sweeney -- Roth Capital -- Analyst

Sorry. I didn't mean. I was just making sure, you're standing on your toes toward the end of the call, but.

Dennis M. Bertolotti -- President and Chief Executive Officer

You did.

Gerry Sweeney -- Roth Capital -- Analyst

How much visibility? I mean, do you have into these exchanges? Obviously, there are contracts, but are they staggered multi-year ones? So it sounds like recurring should become a higher percentage of revenue for the next several years. Is that what I'm hearing.

Dennis M. Bertolotti -- President and Chief Executive Officer

Yeah, you're right. I mean, what with guided visibility is these RFIs and RFEs and all these things, and they can go anywhere from a few months to six months to 12 months to -- complete the cycle. We don't have an idea of how many of those exactly will win or lose, but we can't. What we can't tell you is we're starting to see a lot more activity in those types of contracts.

I think a lot of customers are looking for a couple of years ago, they were chasing after the lowest price regardless of consequence. And I think, that's changed. Now that the oil market has changed for them. And they've become more stable. They're looking for a more stable provider. So there's a lot of changes in all the contracts.

So what we can say is we're seeing a lot more bidding activity, a lot more things going on. What we can't say, though, Gerry, is how many exactly will land. But we feel good about all the activity that's out there.

Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer

And Gerry, just to add to Dennis's answer. That's really one of the key reasons why we're focused on some of the things that Dennis alluded to in the call with MISTRAS did -- along with the ART Crawler. If anything, those two additions to the portfolio really generate a lot of interest within the existing customer base and within prospects out there. So as Dennis talks about increasing the amount of recurring revenue, those two will be kind of the anchors that we used to make that increase occur.

Gerry Sweeney -- Roth Capital -- Analyst

Great, I appreciate it. Thanks for the -- for the answer and apologize for hitting you, three in a row.

Dennis M. Bertolotti -- President and Chief Executive Officer

Oh, no problem. It's good keeping me on my toes.

Operator

Thank you. [Operator Instructions] Our next question comes from Edward Marshall with Sidoti. Your line is now open.

Edward Marshall -- Sidoti -- Analyst

Good morning, guys. How are you?

Dennis M. Bertolotti -- President and Chief Executive Officer

Very good, Ed.

Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer

Good morning, Ed.

Edward Marshall -- Sidoti -- Analyst

So I wanted to ask, if we could drill down on the services margin just a bit. And I wanted to get a sense from you as how much of that improvement was maybe top line volume driven. Maybe the acquisition of Onstream as that pulls through, price-driven wage inflation and then the cost initiatives. If you kind of parse out. What kind of -- what kind of occurred in Q2 with services?

Edward J. Prajzner -- Senior Vice President, Chief Financial Officer and Treasurer

Well, hey it's Ed here. You get a combination of factors helping us there. Certainly the sales mix is helping the contribution of Onstream being higher than the base average, certainly helps. There's efficiencies in our base business, definitely helping. As Dennis said, the cost pressures on labor are kind of a push. We're getting some pass through. So maybe that

that may be flattish or potentially even flattening out the margin a little bit. But you've got a combination from all fronts there. Sequentially, you have good leverage, good contribution margin dropping down from what you saw in Q1 versus what's in Q2 now. So you really have kind of all -- all levels contributing there. Bringing us up to that, you know, pretty close to 30-ish percent gross margin and then expanding on -- down to the operating margin line. So we've kind of got all -- all components you mentioned there sort of helping the case.

Dennis M. Bertolotti -- President and Chief Executive Officer

Ed, this is Dennis. I really believe it's kind of. Our plan is coming together -- some quarters, little better than others. But we've been trying to push to get good contract. We've been trying to push to get acquisitions and customers that see the value in us and not just trying to go after revenues. And I think, what you're seeing is a reflection of that in our margins going up from contribution through gross down to operating and EBITDA. So, I think, what you're seeing is -- is hopefully a trend that we will keep pushing quarter after quarter. Obviously, there's going to be some variation quarter over quarter, but we believe that we can keep pushing the margins up and keep growing our business, getting some organic growth, getting acquisitive growth while maintaining margin growth as well. We believe, this is part of what we can do as our future.

Edward Marshall -- Sidoti -- Analyst

It's good to hear. You've talked about Onstream a bit in the call. I'm curious, if you could talk about maybe the contribution in revenue and profits and confirm for me that you said that you saw very little in the U.S. right now that. So that would have been a Canadian-driven kind of revenue component.

Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer

Yeah. Ed, it's Jon. You know, the net quoted [Phonetic] -- the increases in revenue, there is acquisition, that was really the Onstream impact. And I think that was about.

Dennis M. Bertolotti -- President and Chief Executive Officer

5% of our total.

Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer

5% of growth year over year. So or 5% of total. I am sorry. In terms of the, it is primarily a Canadian story so far, because that's really where they started and that's where the lion share of their revenues are. But the -- you know, the growth that they've seen this year has been in the United States primarily, and we expect that to continue in the future.

Edward Marshall -- Sidoti -- Analyst

Now, if I just think through the holistic view of -- of trial runs with customers, my sense is you're probably seeing a minor drag on the profitability of that business especially in the United States. Is that measurable? I mean, is that something that when I look at your services business, we could see upside from here in the future as you kind of build that segment out, go from a -- maybe a cost even revenue to cost even kind of scenario to maybe a more profitable scenario that that Onstream could normally run. I'm just trying to think that through as you're investing in that both geographic and product market within the United States.

Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer

Absolutely. There's upside. The great thing about the line of business that Onstream is in is that there were very few competitors, who do what they do. And so margins tend to be healthier than what we have in our typical NDT business, because there's just fewer competitors. There's a high technology content to what they do. Software is -- an intelligence content to what they do. So their margins on their incremental revenue are very nice. And even in the trial runs that we are doing now as those tend to be paying. But your point is really utilization story. The more runs that we can get, the more share of customers that we can -- we can gain and add value to -- the better for us and better for the bottom line.

Edward Marshall -- Sidoti -- Analyst

So since you brought it up. Could you talk about the incremental margin in that business, maybe the contribution margin?

Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer

Well, for competitive purposes, we'd rather not go into that kind of depth about any particular product line but it's positive.

Edward Marshall -- Sidoti -- Analyst

I thought so. When you look into the fall and the impacts from IMO 2020. I mean, do you get a sense there might have been a pull forward and maybe maintenance inspection into the spring period versus kind of what -- would it be anticipated into the fall? And so I'm just trying to get a sense about, you know Q2 versus the balance of the year and how that might play out ahead of IMO 2020?

Dennis M. Bertolotti -- President and Chief Executive Officer

Yeah. You know I mean, we get this question asked a lot. The truth is. We don't track what the turnarounds are caused by. But I get to see one based on just trying to do to sulfur content you known change for the diesel. So what we're seeing is, is you know, whether coming down from a cat cracker catalyst change or something whatever the nature is, we know that there is some portion of the contract that's in there, and part of the work that's in there is for this, but we don't track particular to what part of it is for that. Our Gulf locations, our West Coast locations might be seeing a little bit more of that. Obviously our Midwest and all those aren't seeing it, but we haven't seen one area getting more turnaround so much more than the other based on just through IMO. I've seen it a little bit in Europe. We've seen it a little bit in the Gulf, but we haven't. Like I say, we don't track it specifically to those reasons for extending the turnaround or causing them.

Edward Marshall -- Sidoti -- Analyst

Great. Thanks, guys. Appreciate the time.

Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer

No problem.

Dennis M. Bertolotti -- President and Chief Executive Officer

Thank you, Ed.

Operator

Thank you. And our next question comes from Tahira Afzal with KeyBanc. Your line is now open. [Operator Instructions]

Tahira Afzal -- KeyBanc -- Analyst

Sorry, about that, guys. I had you on mute. I guess, I just had one question and that is in regards to your business on the aerospace side. Can you talk a bit about whether there have been some positive trickle-throughs now that we are little far away from Boeing [Indecipherable] issues.

Dennis M. Bertolotti -- President and Chief Executive Officer

Tahira, what we've seen is immediately right now. No, we haven't seen any changes. But what -- and again, the problems with the macro more software bug. What the bigger problem was that we see is Boeing is having some issues, you know, from government oversight and how much is internal versus external inspection. So if anything, I think in the long run, there a possibility that more of these inspections, regardless of what type of material you're talking about, are going to go to third party companies. If something like that changes. We absolutely see that being an upside for us because our locations that we have have a very high amount of certification and are things that prohibit other people from jumping into it. So if the market does see an inflection from third party inspections going out there, companies like MISTRAS would definitely benefit. But in this quarter, no, there hasn't been any immediate impact.

Tahira Afzal -- KeyBanc -- Analyst

Got it. Okay. And then, you know, this might be a long shot. But, you know, we've been watching all the developments with NASA and the lunar program, any thoughts around how you could leverage your expertise. So do you feel that's not an area of focus or potential opportunities for yourself.

Dennis M. Bertolotti -- President and Chief Executive Officer

You know, it's great question. Absolutely I think probably more on the private side than on the government's side, because you've got lot of private companies doing that and they're sending up rockets and satellites and all that on a very regular basis. So we definitely are looking at that and we're working with those companies as well. We see as they ramp up their -- their mono liftoffs and all that has to do with reinspections, all that has to do with new material going through. So we absolutely see that as a potential for us and for the market at all.

Tahira Afzal -- KeyBanc -- Analyst

Got it. Thank you very much.

Dennis M. Bertolotti -- President and Chief Executive Officer

You got it.

Operator

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Dennis Bertolotti for any further remarks.

Dennis M. Bertolotti -- President and Chief Executive Officer

Okay. I would like to say that we appreciate everyone's interest in MISTRAS. We look forward to updating you on our next schedule call. I'd like to thank everyone for listening today's call. Have a safe, productive day,

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Nestor S. Makarigakis -- Group Director of Marketing Communications

Dennis M. Bertolotti -- President and Chief Executive Officer

Edward J. Prajzner -- Senior Vice President, Chief Financial Officer and Treasurer

Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer

Tahira Afzal -- KeyBanc -- Analyst

David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst

Chip Moore -- Canaccord -- Analyst

Gerry Sweeney -- Roth Capital -- Analyst

Edward Marshall -- Sidoti -- Analyst

More MG analysis

All earnings call transcripts

AlphaStreet Logo